[Federal Register Volume 72, Number 77 (Monday, April 23, 2007)]
[Proposed Rules]
[Pages 20080-20087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-7601]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 20

[REG-143316-03]
RIN 1545-BC56


Guidance Under Section 2053 Regarding Post-Death Events

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed amendments to the regulations 
relating to the amount deductible from a decedent's gross estate for 
claims against the estate under section 2053(a)(3) of the Internal 
Revenue Code (Code). In addition, the proposed regulations update the 
provisions relating to the deduction for certain state death taxes to 
reflect the statutory amendments made in 2001 under sections 2053(d) 
and 2058. The proposed regulations will affect estates of decedents 
against whom there are claims outstanding at the time of the decedent's 
death. This document also provides notice of a public hearing on these 
proposed regulations.

DATES: Written or electronic comments must be received by July 23, 
2007. Outlines of topics to be discussed at the public hearing 
scheduled for August 6, 2007, at 10 a.m., must be received by July 30, 
2007.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-143316-03), Room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
143316-03), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC; or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-143316-03). 
The public hearing will be held in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
DeAnn K. Malone, at (202) 622-3112; concerning submissions of comments, 
the hearing, and/or to be placed on the building access list to attend 
the hearing, Richard Hurst, at (202) 622-2949 (TDD telephone) (not 
toll-free numbers) or e-mail at <a href="/cdn-cgi/l/email-protection#b7e5ded4dfd6c5d399f699ffc2c5c4c3f7dec5c4d4d8c2d9c4d2db99c3c5d2d6c499d0d8c1"><span class="__cf_email__" data-cfemail="7e2c171d161f0c1a503f50360b0c0d0a3e170c0d1d110b100d1b12500a0c1b1f0d50191108">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

Background

    Section 2001 of the Code imposes a tax on the transfer of the 
taxable estate, determined as provided in section 2051, of every 
decedent, citizen, or resident of the United States. Section 2031(a) 
generally provides that the value of the decedent's gross estate shall 
include the value at the time of decedent's death of all property, real 
or personal, tangible or intangible, wherever situated. Section 2051 
provides that the value of the taxable estate is determined by 
deducting from the value of the gross estate the deductions provided 
for in sections 2051 through 2058. Pursuant to section 2053(a), ``the 
value of the taxable estate shall be determined by deducting from the 
value of the gross estate such amounts--(1) for funeral expenses, (2) 
for administration expenses, (3) for claims against the estate, and (4) 
for unpaid mortgages on, or any indebtedness in respect of, property 
where the value of the decedent's interest therein, undiminished by 
such mortgage or indebtedness, is included in the value of the gross 
estate, as are allowable by the laws of the jurisdiction, whether 
within or without the United States, under which the estate is being 
administered.''
    The deductions allowable under sections 2051 through 2058 operate 
to eliminate from estate taxation those portions of the gross estate 
that are necessarily expended in paying certain claims and expenses of 
the estate. The rationale for those deductions is that those expended 
portions of the gross estate are not transferred to the decedent's 
legatees, beneficiaries, or heirs and, therefore, are not subject to 
the transfer tax.
    The amount an estate may deduct for claims against the estate has 
been a highly litigious issue. Unlike section 2031, section 2053(a) 
does not contain a specific directive to value a deductible claim at 
its date of death value. Section 2053, in fact, specifically 
contemplates expenses such as funeral and administration expenses, 
which are only determinable after the decedent's date of death. 
Although numerous courts have addressed section 2053(a)(3), there is 
little or no consistency among the conclusions of those courts with 
regard to the extent (if any) to which post-death events are to be 
considered in valuing such claims. One line of cases follows the 
decision in Ithaca Trust v. Commissioner, 279 U.S. 151 (1929), holding 
that the estate tax charitable deduction for a charitable remainder 
interest was to be determined as of date of death. In Federal judicial 
circuits where the Ithaca Trust date-of-death valuation approach is 
applied to a claim against a decedent's estate under section 
2053(a)(3), courts generally hold that post-death events may not be 
considered when determining the amount deductible for that claim. At 
the opposite end of the spectrum, there is a line of cases that follows 
the Eighth Circuit's opinion in Jacobs v. Commissioner, 34 F.2d 233 
(8th Cir. 1929), cert. denied, 280 U.S. 603 (1929), in which the court 
considered but rejected the date-of-death valuation approach in 
determining the deductible amount of a claim against the estate. The 
court in Jacobs distinguished Ithaca Trust, stating that, unlike 
charitable deductions, ``* * * the claims which Congress intended to be 
deducted were actual claims, not theoretical ones.'' The

[[Page 20081]]

court therefore held that only claims presented and determined as valid 
against the estate and actually paid could be deducted as claims 
against the estate. Jacobs, 34 F.2d at 235. The courts that follow 
Jacobs generally restrict the amount deductible under section 
2053(a)(3) to amounts actually paid by the estate in satisfaction of 
the claim.
    Even in the circuits where the date-of-death valuation approach has 
been applied in determining the amount that may be deducted for a claim 
against the decedent's estate, courts have recognized exceptions that 
necessitate taking into account events that occur after the decedent's 
death. For example, courts have deviated from the date-of-death 
valuation approach in favor of the actual payment approach when a claim 
is contested, contingent, unenforceable, becomes unenforceable after 
the decedent's death, or is not in fact presented for payment. The 
application and extent of these exceptions are inconsistent from 
circuit to circuit, however, and cannot be reconciled to form a 
conclusive rule applicable to all estates.
    The result of this lack of consistency in the case law is that 
similarly situated estates are being treated differently for Federal 
estate tax purposes, depending only upon the jurisdiction in which the 
executor resides. The Treasury Department and the IRS believe that 
similarly situated estates should be treated consistently by having 
section 2053(a)(3) construed and applied in the same way in all 
jurisdictions.
    One possible approach would be to value claims against a decedent's 
estate on the basis of the facts existing on the date of the decedent's 
death. The Treasury Department and the IRS believe, however, that this 
date-of-death valuation approach, when applied, has required an 
inefficient use of resources for taxpayers, the IRS, and the courts. 
Determining a date-of-death value requires the taxpayer and the IRS to 
retry the substantive issues underlying the claims against the estate 
in a tax controversy setting. In most cases, the tax controversy is 
addressed after the issue either has been settled by or has been argued 
by parties with adverse interests in a court of competent jurisdiction 
that is more familiar with the nuances of the underlying applicable 
law. Furthermore, this approach has proven to be expensive, both in 
terms of appraisal and litigation costs. In addition, this approach 
generally results in a deduction that is different from the amount 
actually paid on disputed claims. Finally, the date-of-death valuation 
approach often forces the taxpayer involved in actively defending 
against a claim to take contradictory positions on the estate tax 
return and in the substantive court pleadings, and may actually 
increase the taxpayer's potential liability.
    After carefully considering the numerous judicial decisions and the 
analysis and conclusion in each, the legislative history of section 
2053 and its predecessors, and the various possible alternatives, and 
in order to further the goal of the effective and fair administration 
of the tax laws, the proposed regulations adopt rules based on the 
premise that an estate may deduct under section 2053(a)(3) only amounts 
actually paid in settlement of claims against the estate. If the 
resolution of a contested or contingent claim cannot be reached prior 
to the expiration of the period of limitations for claims for refund, 
the estate may file a protective claim for refund to preserve its right 
to claim a deduction under section 2053(a).

Explanation of Provisions

    The proposed regulations will amend the regulations under section 
2053 to clarify that events occurring after a decedent's death are to 
be considered when determining the amount deductible under all 
provisions of section 2053 and that deductions under section 2053 are 
limited to amounts actually paid by the estate in satisfaction of 
deductible expenses and claims. Final court decisions as to the amount 
and enforceability of the claim or expense are accepted in determining 
the amount deductible if the court passes upon the facts upon which 
deductibility depends. Settlements are accepted if they are reached in 
bona fide negotiations between adverse parties with valid claims 
recognizable under applicable law, and if they are not inconsistent 
with the applicable law. A protective claim for refund may be filed 
before the expiration of the period of limitations for claims for 
refund in order to preserve the estate's right to claim a refund if the 
amount of a liability will not be ascertainable by the time of the 
expiration of the period of limitations for claims of refund. A 
deduction is not allowed to the extent the expense or claim is 
compensated for by insurance or is otherwise reimbursed.
    The proposed regulations further provide that no deduction may be 
taken on an estate tax return for a claim that is potential, unmatured, 
or contested at the time the return is filed. A protective claim for 
refund may be filed before the expiration of the period of limitations 
for claims for refund in order to preserve the estate's right to claim 
a refund by reason of the deduction of a claim against the estate to 
the extent that claim is ultimately paid by the estate.
    Additional provisions in the proposed regulations provide guidance 
for other particular circumstances. When a claim against an estate 
lists multiple defendants, the estate may only deduct the decedent's 
portion of the liability. Claims by family members or beneficiaries of 
a decedent's estate will be strictly scrutinized to ensure that they 
are legitimate claims. If a claim becomes unenforceable after the 
decedent's death, the estate may not take a section 2053(a)(3) 
deduction with respect to the claim. If a claim represents a decedent's 
obligation to make recurring payments that will likely continue for a 
period extending beyond the final determination of the estate tax 
liability, a deduction is allowed only as each payment is made, 
provided the period of limitations for claims for refund has not 
expired or the estate has properly preserved the claim for refund. 
Alternatively, a deduction is allowed for the cost of a commercial 
annuity purchased by the estate from an unrelated dealer in commercial 
annuities in satisfaction of that obligation.
    Finally, the proposed regulations reflect changes made to section 
2053(d) and the enactment of section 2058 in 2001 and clarify that the 
rules in section 20.2053-9 apply only to the estates of decedents dying 
on or before December 31, 2004.

Proposed Effective Date

    The regulations, as proposed, apply to the estate of any decedent 
dying on or after the date final regulations are published in the 
Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Therefore, a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

[[Page 20082]]

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department also request comments on the 
clarity of the proposed rules and how they can be made easier to 
understand. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for August 6, 2007, at 10 a.m. 
in the IRS Auditorium, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance. In addition, 
all visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments by July 16, 2007, and an outline of the topics to be 
discussed and the time to be devoted to each topic (signed original and 
eight (8) copies) by July 30, 2007. A period of 10 minutes will be 
allotted to each person for making comments. An agenda showing the 
scheduling of the speakers will be prepared after the deadline for 
receiving outlines has passed. Copies of the agenda will be available 
free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is DeAnn K. 
Malone, Office of the Chief Counsel, IRS.

List of Subjects in 26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 20 is proposed to be amended as follows:

PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954

    Paragraph 1. The authority citation for part 20 continues to read 
in part as follows:

    Authority: 26 U.S.C. 7805. * * *

    Par. 2. Section 20.2051-1 is revised to read as follows:


Sec.  20.2051-1  Definition of taxable estate.

    (a) The taxable estate of a decedent who was a citizen or resident 
(see Sec.  20.0-1(b)(1)(i)) of the United States at death is determined 
by subtracting the total amount of the deductions authorized by 
sections 2052 through 2058 from the total amount which must be included 
in the gross estate under sections 2031 through 2044. These deductions 
are in general as follows:
    (1) An exemption of $60,000 (section 2052) (applicable only to the 
estates of decedents dying on or before December 31, 1976).
    (2) Funeral and administration expenses and claims against the 
estate (including certain taxes and charitable pledges) (section 2053).
    (3) Losses from casualty or theft during the administration of the 
estate (section 2054).
    (4) Charitable transfers (section 2055).
    (5) The marital deduction (section 2056).
    (6) Qualified domestic trusts (section 2056A).
    (7) Family-owned business interests (section 2057) (applicable only 
to the estates of decedents dying on or before December 31, 2003).
    (8) State death taxes (section 2058) (applicable only to the 
estates of decedents dying after December 31, 2004).
    (b) See section 2106 and these regulations for the computation of 
the taxable estate of a decedent who was not a citizen or resident of 
the United States. See also Sec.  1.642(g)-1 of this chapter concerning 
the disallowance for income tax purposes of certain deductions allowed 
for estate tax purposes.
    (c) Effective date. The rules of this section apply to the estates 
of decedents dying on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register.
    Par. 3. Section 20.2053-1 is amended by:
    1. Revising the introductory text of paragraph (a).
    2. Adding two new sentences at the end of paragraph (b)(1).
    3. Revising paragraph (b)(2).
    4. Redesignating paragraph (b)(3) as (b)(4) and revising the newly-
designated paragraph (b)(4).
    5. Adding new paragraphs (b)(3), (b)(5), (b)(6), and (e).
    The revisions and additions read as follows:


Sec.  20.2053-1  Deductions for expenses, indebtedness, and taxes; in 
general.

    (a) General rule. In determining the taxable estate of a decedent 
who was a citizen or resident of the United States at death, there are 
allowed as deductions under section 2053(a) and (b) amounts falling 
within the following two categories (subject to the limitations 
contained in this section and in Sec. Sec.  20.2053-2 through 20.2053-
10):
* * * * *
    (b) * * * (1) * * * In order to properly take into account events 
occurring after the date of a decedent's death when determining the 
amount deductible against a decedent's estate, the deduction for any 
item described in paragraph (a) of this section is limited to the total 
amount actually paid (subject to any time requirement under paragraph 
(a) of this section) in settlement or satisfaction of that item. (See 
however, Sec.  20.2053-1(b)(4) for a special rule for deducting certain 
estimated amounts.)
    (2) Effect of court decree--(i) In general. If the court with 
appropriate jurisdiction over the administration of the estate reviews 
and approves expenditures for funeral expenses, administration 
expenses, claims against the estate, or unpaid mortgages as allowable 
estate expenditures under local law, the executor may rely on the final 
judicial decision in that matter to determine the amount deductible for 
estate tax purposes if the following conditions are satisfied: The 
expenditures are otherwise deductible under section 2053 and the 
corresponding regulations; the expenditures have been paid by the 
estate or meet the requirements for estimated expenses; the court 
reviewed the facts relating to the expenditures; and the court's 
decision is consistent with local law. See Sec.  20.2053-2 for 
additional rules regarding the deductibility of funeral expenses. See 
Sec.  20.2053-3 for additional rules regarding the deductibility of 
administration expenses. See Sec.  20.2053-4 for additional rules 
regarding the deductibility of claims against the estate. See Sec.  
20.2053-7 for additional rules regarding the deductibility of unpaid 
mortgages. If the decision reached by the court is inconsistent with 
local law, the estate may not rely on the court's decree to establish 
the

[[Page 20083]]

amount deductible for estate tax purposes. For example, a local court 
decree approving an allowance made to an executor in excess of the 
amount or limit prescribed by statute may not be relied upon to 
establish the amount deductible under section 2053. An estate will not 
be denied an otherwise allowable deduction under section 2053 solely 
because a local court decree has not been entered with respect to that 
amount if the amount would be allowable under local law and if no court 
decree is required under applicable law for payment.
    (ii) Consent decree. An executor may rely on a local court decree 
rendered by consent to establish the amount deductible under section 
2053 for amounts paid (or meeting the requirements for estimated 
expenses) if the consent was a bona fide recognition of the validity of 
the claim and was accepted by the court as satisfactory evidence upon 
the merits. Consent given by all parties having interests adverse to 
that of the claimant will be presumed to be recognition of the claim's 
validity. See Sec.  20.2053-4(b)(4) for special rules to determine the 
amount deductible for claims by decedent's family members, related 
entities, or beneficiaries of the decedent's estate or revocable trust.
    (3) Settlements. An executor may rely on a settlement to establish 
the amount deductible under section 2053 for amounts paid (or meeting 
the requirements for estimated expenses) (subject to any applicable 
time limitation under paragraph (a) of this section) if the following 
conditions are satisfied: The settlement resolves a bona fide issue in 
an active and genuine contest; the settlement is the product of arm's 
length negotiations by parties having adverse interests with respect to 
the claim; and the settlement is within the range of reasonable 
outcomes under applicable state law governing the issues resolved by 
the settlement. A settlement that results in a compromise between the 
positions of such adverse parties and reflects the parties' assessments 
of the relative strengths of their respective positions is a settlement 
that is within the range of reasonable outcomes. However, a deduction 
for amounts paid in settlement of a claim against the decedent's estate 
will not be allowed if the terms of the settlement are inconsistent 
with applicable local law. No deduction will be allowed for amounts 
paid in settlement of an unenforceable claim. See Sec.  20.2053-4(b)(4) 
for special rules to determine the amount deductible for claims by 
decedent's family members, related entities, or beneficiaries of the 
decedent's estate or revocable trust. For settlements structured using 
recurring payments, see Sec.  20.2053-4(b)(7).
    (4) Estimated amounts. A deduction will be allowed for a claim that 
satisfies all applicable requirements even though its exact amount is 
not then known, provided that the amount is ascertainable with 
reasonable certainty, and will be paid. Under this exception to the 
rule set forth in paragraph (b)(1) of this section, no deduction may be 
taken upon the basis of a vague or uncertain estimate. If a deduction 
is allowed in advance of payment and the payment is thereafter waived 
or otherwise left unpaid, it shall be the duty of the executor to 
notify the Commissioner and to pay the resulting tax, together with 
interest. To the extent that the amount of a liability otherwise 
deductible under section 2053 is not ascertainable with reasonable 
certainty at the time of examination of the return by the Commissioner, 
or to the extent that it is not then clear that the amount will be 
paid, that amount will not be allowed as a deduction by the 
Commissioner. If the deduction is disallowed in whole or in part on 
examination of the return and the amount of the liability is 
subsequently ascertained and paid, relief may be sought by a timely 
claim for refund as provided by section 6511. A protective claim for 
refund may be filed before the expiration of the period of limitations 
for claims for refund in order to preserve the estate's right to claim 
a refund if the amount of a liability was or will not be paid before 
the expiration of the period of limitations for claims for refund. 
Although the protective claim need not state a particular dollar amount 
or demand an immediate refund, the protective claim must identify the 
outstanding liability or claim that would have been deductible under 
section 2053(a) had it already been paid. The protective claim must 
also describe the reasons and contingencies delaying the determination 
of the liability or the actual payment of the claim. Action on 
protective claims will proceed after the executor has notified the 
Commissioner that the contingency has been resolved.
    (5) Reimbursements. A deduction is not allowed to the extent that 
the expense or claim is or could be compensated for by insurance or 
otherwise reimbursed.
    (6) Examples. The following examples illustrate the application of 
this section. Assume that the amounts are payable out of property 
subject to claims and are allowable by the law of the jurisdiction 
governing the administration of the estate, whether the applicable 
jurisdiction is within or without the United States.

    Example 1. Estimated amounts, deduction ascertainable. 
Decedent's (D's) estate was probated in state. State law provides 
that the personal representative shall receive compensation equal to 
2.5 percent of the value of the probate estate. The executor (E) may 
claim a deduction for estimated fees equal to 2.5 percent of D's 
probate estate on the estate tax return filed for D's estate as an 
estimated amount, provided the amount will be paid to E after the 
estate tax return is filed. To the extent that, at the time of the 
examination of the return, the amount has not been paid and E cannot 
satisfy the conditions listed in paragraph (b)(4) of this section 
and Sec.  20.2053-3(b)(1), the deduction will be disallowed, but the 
executor may file a timely protective claim for refund to protect 
the estate's right to a refund once the amount has been paid or 
satisfies the applicable conditions. If the deduction is allowed in 
advance of payment and the payment is thereafter waived or otherwise 
left unpaid, it shall be the duty of the executor to notify the 
Commissioner and to pay the resulting tax, together with interest.
    Example 2. Estimated amounts, deduction not ascertainable. Prior 
to death, Decedent (D) is sued by Claimant (C) for $100x in a tort 
proceeding and responds asserting affirmative defenses available to 
D under applicable local law. C and D are unrelated. D subsequently 
dies and D's Form 706 is due before a final judgment is entered in 
the case. The executor (E) of D's estate may not take a deduction 
for $100x on D's estate tax return as an estimated amount because 
the deductible amount cannot be ascertained with reasonable 
certainty in accordance with Sec.  20.2053-4(b)(2). If the amount of 
the actual liability will not be paid or cannot be ascertained with 
reasonable certainty before the expiration of the period of 
limitations for claims for refund, E may file a protective claim 
before that date in order to preserve the estate's right 
subsequently to claim a refund.
* * * * *
    (e) Effective date. The rules of this section apply to the estates 
of decedents dying on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register.
    Par. 4. Section 20.2053-3 is amended by:
    1. Redesignating paragraphs (b)(2) and (b)(3) as paragraphs (b)(4) 
and (b)(5), respectively.
    2. Designating the undesignated text following paragraph (b)(1) as 
new paragraph (b)(3).
    3. Revising paragraphs (b)(1) and (c)(1).
    4. Adding new paragraphs (b)(2), (d)(3) and (e).
    The revisions and additions read as follows:


Sec.  20.2053-3  Deductions for expenses of administering estate.

* * * * *

[[Page 20084]]

    (b) Executor's commissions. (1) The executor, in filing the estate 
tax return, may deduct executor's commissions in such an amount as has 
actually been paid, or in an amount which at the time of filing the 
estate tax return may reasonably be expected to be paid, but no 
deduction may be taken if no commissions are to be collected. If the 
amount of the commissions has not been fixed by decree of the proper 
court, the deduction will be allowed on the examination of the return, 
to the extent that all three of the following conditions are satisfied:
    (i) The Commissioner is reasonably satisfied that the commissions 
claimed will be paid.
    (ii) The amount claimed as a deduction is within the amount 
allowable by the laws of the jurisdiction in which the estate is being 
administered.
    (iii) It is in accordance with the usually accepted practice in the 
jurisdiction to allow such an amount in estates of similar size and 
character.
    (2) If the conditions described in paragraph (b)(1) of this section 
are not met, a protective claim for refund may be filed before the 
expiration of the period of limitations for claims for refund in order 
to preserve the estate's right to claim a refund for future amounts 
paid as described in Sec.  20.2053-1(b)(4).
    (3) If the deduction is disallowed in whole or in part on the 
examination of the return and a protective claim was timely filed, the 
disallowance will be subject to modification once the requirements for 
deductibility are met. If the deduction is allowed in advance of 
payment and payment is thereafter waived or otherwise left unpaid, it 
shall be the duty of the executor to notify the Commissioner and to pay 
the resulting tax, together with interest.
* * * * *
    (c) Attorney's fees. (1) The executor, in filing the estate tax 
return, may deduct such an amount of attorney's fees as has actually 
been paid, or an amount which at the time of filing may reasonably be 
expected to be paid. If on the examination of the return, the fees 
claimed have not been awarded by the proper court and paid, the 
deduction will, nevertheless, be allowed, if the Commissioner is 
reasonably satisfied that the amount claimed will be paid and that it 
does not exceed a reasonable remuneration for the services rendered, 
taking into account the size and character of the estate and the local 
law and practice. If the amount does not satisfy these requirements, a 
protective claim for refund may be filed before the expiration of the 
period of limitations for claims for refund in order to preserve the 
estate's right to claim a refund for future amounts paid as described 
in Sec.  20.2053-1(b)(4). If the deduction is disallowed in whole or in 
part on the examination of the return and a protective claim was timely 
filed, the disallowance will be subject to modification once the 
requirements for deductibility are met.
* * * * *
    (d) * * *
    (3) Expenses incurred in defending the estate against claims 
described in section 2053(a)(3) are deductible as provided in Sec.  
20.2053-1 if the expenses are incurred incident to the assertion of 
defenses to the claim available under the applicable law, even if the 
estate is not ultimately victorious. For purposes of this section, 
``expenses incurred in defending the estate against claims'' include 
costs relating to the arbitration and mediation of contested issues, 
costs associated with defending the estate against claims (whether or 
not enforceable), and costs associated with reaching a negotiated 
settlement of the issues. Expenses incurred merely for the purpose of 
unreasonably extending the time for payment, or incurred other than in 
good faith, are not deductible.
    (e) Effective date. The rules of this section apply to the estates 
of decedents dying on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register.
    Par. 5. Section 20.2053-4 is revised to read as follows:


Sec.  20.2053-4  Deduction for claims against the estate.

    (a) In general. (1) For purposes of this section, liabilities 
imposed by law or arising out of contracts or torts are deductible if 
they meet the requirements set forth in Sec.  20.2053-1 and this 
section. Except as provided in paragraph (b) of this section, the 
amounts that may be deducted as claims against a decedent's estate are 
limited to amounts for legitimate and bona fide claims that--
    (i) Represent personal obligations of the decedent existing at the 
time of the decedent's death;
    (ii) Are enforceable against the decedent's estate at the time of 
payment; and
    (iii) Are actually paid by the estate in settlement of the claim.
    (2) Events occurring after the date of a decedent's death shall be 
considered when determining the amount deductible against a decedent's 
estate.
    (b) Special rules--(1) Potential and unmatured claims. Claims that 
are unmatured on the date of the decedent's death and that later mature 
and are paid are deductible by the estate. However, no deduction may be 
taken on an estate tax return for a potential or unmatured claim. If 
the claim matures and is paid prior to the expiration of the period of 
limitations for filing a claim for refund, the estate may file a claim 
for refund as provided by section 6511. A protective claim for refund 
may be filed before the expiration of the period of limitations for 
claims for refund in order to preserve the estate's right to claim a 
refund once the claim against the decedent's estate is matured and is 
paid or may be estimated as provided in Sec.  20.2053-1(b)(4). Although 
the protective claim need not state a particular dollar amount or 
demand an immediate refund, the protective claim must identify the 
outstanding liability or claim that would have been deductible under 
section 2053(a) had it already been paid, and must describe the reasons 
and contingencies delaying actual payment of the liability or claim. 
Action on protective claims will proceed after the executor has 
notified the Commissioner that the contingency has been resolved.
    (2) Contested claims. No deduction may be taken on an estate tax 
return for a claim against the decedent's estate to the extent the 
estate is contesting the decedent's liability. However, see Sec.  
20.2053-1(b)(4) relating to estimated amounts.
    (3) Claims against multiple parties. If the decedent or the 
decedent's estate is one of two or more parties against whom the claim 
is being asserted, the estate may only deduct the portion of the total 
claim due from and paid by the estate, reduced by the total of any 
reimbursement received from another party, insurance, or otherwise. The 
estate's deductible portion will also be reduced by the amount or 
contribution the estate could have collected from another party or an 
insurer but which the estate declines or fails to attempt to collect. 
If, however, the estate establishes that the burden of necessary 
collection efforts would have outweighed the benefit from those 
efforts, the potential reimbursement will not reduce the estate's 
deductible portion of the total claim. If the estate establishes that 
the party from whom a potential reimbursement could be collected could 
only pay a portion of the potential reimbursement, then only that 
portion that could reasonably have been expected to be collected will 
reduce the estate's deductible portion of the total claim.
    (4) Claims by family members, related entities, or beneficiaries. 
Relationships with and among a decedent and the

[[Page 20085]]

decedent's family members, related entities, and beneficiaries may 
create the potential for collusion in asserting invalid or exaggerated 
claims in order to reduce the decedent's taxable estate. Thus, 
notwithstanding Sec.  20.2053-1 and paragraph (a) of this section, 
there will be a rebuttable presumption that claims by a family member 
of the decedent, a related entity, or a beneficiary of the decedent's 
estate or revocable trust are not legitimate and bona fide and 
therefore are not deductible. Evidence sufficient to rebut the 
presumption may include evidence that the claim arises from 
circumstances that would reasonably support a similar claim by 
unrelated persons or non-beneficiaries. Similarly, a settlement between 
a decedent's estate or revocable trust and a family member, a related 
entity, or a beneficiary of the decedent's estate or revocable trust 
will be presumed to not be deductible absent evidence of the legitimacy 
and bona fide nature of the claim. For purposes of this section, family 
members include the spouse of the decedent; the grandparents, parents, 
siblings, and lineal descendants of the decedent or of the decedent's 
spouse; and the spouse and lineal descendants of any such grandparent, 
parent, and sibling. Family members include adopted individuals. For 
purposes of this section, a related entity is an entity in which the 
decedent, either directly or indirectly, had a beneficial ownership 
interest at the time of the decedent's death or at any time during the 
three-year period ending on the decedent's date of death. Such an 
entity, however, shall not include a publicly-traded entity nor shall 
it include a closely-held entity in which the combined beneficial 
interest, either direct or indirect, of the decedent and the decedent's 
family members, collectively, is less than thirty percent of the 
beneficial ownership interests (whether voting or non-voting).
    (5) Unenforceable claims. Claims that are unenforceable prior to or 
at the decedent's death are not deductible, even if they are actually 
paid. Claims that become unenforceable during the administration of the 
estate are not deductible to the extent that they are paid after they 
become unenforceable. To the extent that enforceability of a claim is 
at issue, see paragraph (b)(2) of this section relating to contested 
claims.
    (6) Claims founded upon a promise. Except with regard to pledges or 
subscriptions, (see Sec.  20.2053-5), section 2053(c)(1)(A) provides 
that the deduction for a claim founded upon a promise or agreement is 
limited to the extent that the promise or agreement was bona fide and 
in exchange for adequate and full consideration in money or money's 
worth. For this purpose, bona fide and for adequate and full 
consideration in money or money's worth requires that the promise or 
agreement must have been made in good faith, and that the price must 
have been an adequate and full equivalent reducible to a money value.
    (7) Recurring payments--(i) Non-Contingent obligations. If a 
decedent is obligated to make recurring payments on an enforceable and 
certain claim that are not subject to a contingency and if the payments 
will continue for a period that will likely extend beyond the final 
determination of the estate tax liability, the obligation may be 
deducted as an estimated amount using the rules in Sec.  20.2053-1. The 
amount deductible is the present value of the payments on the 
decedent's date of death as determined under Sec.  20.2031-7(d). See 
Sec. Sec.  20.7520-1 through 20.7520-4. If there is a reasonable 
likelihood that full satisfaction of the liability will not be made, 
then the obligation will be deemed to be subject to a contingency for 
purposes of this section.
    (ii) Contingent obligations. If a decedent has a recurring 
obligation to pay an enforceable and certain claim, but the decedent's 
obligation is subject to a contingency or is otherwise not described in 
paragraph (b)(7)(i) of this section, the estate's deduction is limited 
to amounts actually paid by the estate in satisfaction of the claim.
    (iii) Purchase of commercial annuity to satisfy recurring 
obligation to pay. If a decedent has a recurring obligation (whether or 
not contingent) to pay an enforceable and certain claim and the estate 
purchases a commercial annuity from an unrelated dealer in commercial 
annuities in an arms-length transaction to satisfy the obligation, the 
amount deductible by the estate is the sum of--
    (A) The amount paid for the commercial annuity; and
    (B) Any amount actually paid to the claimant by the estate prior to 
the purchase of the commercial annuity.
    (c) Interest on claims. The interest on a deductible claim is 
itself deductible as a claim under section 2053, but only to the extent 
of the amount of interest accrued at the date of the decedent's death 
and actually paid, even if the executor elects the alternate valuation 
method under section 2032. (Post-death accrued interest may be 
deductible in appropriate circumstances either as an estate tax 
administration expense under section 2053 or as an income tax 
deduction.)
    (d) Examples. The following examples illustrate the application of 
paragraphs (a) through (c) of this section. Except as is otherwise 
provided in the examples, assume that the claimant (C) is not a family 
member, related entity or beneficiary of the decedent (D) and is not 
the executor (E). Assume that a claim represents a personal obligation 
of D existing at the time of D's death and is enforceable against D's 
estate. Assume that the payment of the claim, where applicable, is made 
out of property subject to claims (as defined in section 2053(c)(2) and 
Sec.  20.2053-1(c)(2)) and is allowable by the law of the jurisdiction 
under which the decedent's estate is being administered, or is paid 
prior to the filing of the estate tax return (including any extension 
granted under section 6081) from property not subject to claims. Assume 
that any court decree is based upon the facts upon which deductibility 
depends and is consistent with applicable local law. Assume that any 
settlement is reached in bona fide negotiations between or among 
parties having adverse interests with respect to the claim and that the 
terms of the settlement are not inconsistent with applicable local law.

    Example 1. Contested claim, single defendant, no decision. D is 
sued by C for $100x in a tort proceeding and responds asserting 
affirmative defenses available to D under applicable local law. D 
dies and E is substituted as defendant in the suit. D's estate tax 
return is due before a judgment is reached in the case. D's gross 
estate includes only property subject to claims and exceeds $100x. E 
may not take a deduction on the return for the claim under section 
2053(a)(3). A deduction may be claimed on the return, however, for 
expenses incurred prior to the filing of the estate tax return in 
defending the estate against the claim if the expenses have been 
paid in accordance with Sec.  20.2053-3(c) or (d)(3) or as an 
estimate under Sec.  20.2053-1(b)(4). E may file a protective claim 
for refund before the expiration of the period of limitations for 
claims for refund of the estate tax in order to preserve the 
estate's right to claim a refund if the amount of the liability will 
not be paid or cannot be ascertained with reasonable certainty by 
the expiration of that period of limitations. If payment is 
subsequently made pursuant to a court decision or a settlement, a 
deduction for the payment, as well as expenses incurred incident to 
the claim and not previously deducted, may be taken and relief may 
be sought by supplementing a previously filed protective claim or by 
filing a claim for refund as provided by section 6511.
    Example 2. Contested claim, single defendant, final court decree 
and payment. The facts are the same as in Example 1 except that, 
before the return is timely filed, the court enters a decision in 
favor of C, no timely appeal is filed, and payment is made. A 
deduction is allowed for the amount paid in satisfaction of the 
claim pursuant to the final decision of the local court, including 
any interest accrued prior to D's death, under section 2053(a)(3). 
In addition, a deduction may be available under Sec.  20.2053-
3(d)(3) for expenses incurred prior to the filing of the

[[Page 20086]]

estate tax return in defending the estate against the claim and in 
processing payment of the claim.
    Example 3. Contested claim, single defendant, settlement and 
payment. The facts are the same as in Example 1 except that, before 
the return is timely filed, a settlement is reached between D's 
estate and C for $80x and payment is made. A deduction is allowed 
for the amount of the settlement paid to C ($80x) under section 
2053(a)(3). In addition, a deduction may be available under Sec.  
20.2053-3(d)(3) for expenses incurred prior to the filing of the 
estate tax return in defending the estate, reaching a settlement, 
and processing payment of the claim.
    Example 4. Contested claim, multiple defendants. The facts are 
the same as in Example 1 except that the suit filed by C lists D and 
K, an unrelated third-party, as defendants. If the claim is not 
resolved prior to the time the estate tax return is filed, E may not 
take a deduction for the claim under section 2053(a)(3) on the 
return. If payment is subsequently made of D's share of the claim 
pursuant to a court decision or a settlement holding D liable for 40 
percent of the amount due and K liable for 60 percent of the amount 
due, then the estate may take a deduction for the amount paid in 
satisfaction of the claim representing D's share of the liability as 
assigned by the court decree ($40x), plus any interest on that share 
accrued prior to D's death, under section 2053(a)(3). If the court 
decision finds D and K jointly and severally liable for the entire 
$100x and D's estate pays the entire $100x but could have reasonably 
collected $50x from K in reimbursement, the estate may take a 
deduction under section 2053(a)(3) and paragraph (b)(3) of this 
section for only $50x and the interest on $50x accrued prior to D's 
death. In both instances, a deduction may also be available under 
Sec.  20.2053-3(d)(3) for expenses incurred and not previously 
deducted in defending the estate against the claim and processing 
payment of the amount due from D.
    Example 5. Contested claim, multiple defendants, settlement and 
payment. The facts are the same as in Example 1 except that the suit 
filed by C lists D and K, an unrelated third-party, as defendants. 
D's estate settles with C for $10x and payment is made before the 
return is timely filed. E may take a deduction for the amount paid 
to C in satisfaction of the claim. In addition, a deduction may be 
available under Sec.  20.2053-3(d)(3) for expenses incurred prior to 
the filing of the estate tax return in defending the estate, 
reaching a settlement, and processing payment of the claim.
    Example 6. Mixed claims. During life, D contracts with C to 
perform specific work on D's home for $75x. Under the contract, 
additional work must be approved in advance by D. C performs 
additional work and sues D for $100x for work completed including 
the $75x agreed to in the contract. D dies and D's estate tax return 
is due before a judgment is reached in the case. E contests 
liability for $25x. E may take a deduction on the return for $75x if 
it has been paid or if it meets the requirements of an estimated 
amount. In addition, a deduction may be claimed on the return for 
expenses incurred in defending the estate against the claim if they 
have been paid under Sec.  20.2053-3(c) or (d)(3) or as an estimate 
under Sec.  20.2053-1(b)(4). E may file a protective claim for 
refund before the expiration of the period of limitations on claims 
for refund of the estate tax in order to preserve the estate's right 
to claim a refund if payment on any amount in excess of $75x is 
subsequently made in resolution of a claim that would qualify for a 
deduction under section 2053. To the extent that the expenses 
incurred in defending the estate against the claim are not deducted 
as an estimate, they may be included in the protective claim for 
refund.
    Example 7. Unenforceable claims. D is sued by C for $100x in a 
tort proceeding but the claim is barred by the applicable period of 
limitations and there is no other recourse available to C. A 
deduction is not allowed for the claim under section 2053(a)(3) 
whether or not the estate actually pays money in satisfaction of the 
claim. A deduction may be available, however, under Sec.  20.2053-
3(d)(3) for expenses incurred in defending the estate against the 
claim.
    Example 8. Non-contingent and recurring obligation to pay, 
binding on estate. D's property settlement agreement incident to D's 
divorce, signed three years prior to D's death, obligates D or D's 
estate to pay to S, D's former spouse, $20x per year for 10 years. 
The payments are not conditioned on whether or not S remarries. If S 
dies prior to the last payment, the terms of the agreement state 
that the remaining payments are to be made to S's estate or as S may 
appoint in S's will. Prior to filing D's estate tax return, D's 
estate pays the first of the 7 payments remaining as of D's death. 
The estate may take a deduction for the present value of these 
payments. See Sec. Sec.  20.7520-1 through 20.7520-4.
    Example 9. Contingent recurring obligation to pay, binding on 
estate. D's property settlement agreement incident to D's divorce, 
signed three years prior to D's death, obligates D or D's estate to 
pay to S, D's former spouse, $20x per year for 10 years. The 
obligation to make the annual payments ceases upon S's remarriage or 
S's death prior to the due date of the last payment. Prior to filing 
D's estate tax return, D's estate pays the first of the 7 payments 
remaining as of D's death. E may take as a deduction on the return 
the amount of the 1 payment made prior to the filing of D's estate 
tax return. Additional payments become deductible as they are paid. 
E may file a protective claim for refund before the expiration of 
the period of limitations for claims for refund of the estate tax in 
order to preserve the estate's right to claim a refund if the amount 
of the liability will not be paid or is not ascertainable with 
reasonable certainty by the expiration of the applicable period of 
limitations. If the total amount to be paid in satisfaction of the 
liability is not ascertainable with reasonable certainty at the time 
of examination of the return, relief may be sought by a claim for 
refund (either actual or protective) as provided by section 6511.
    Example 10. Recurring obligation to pay, estate purchases a 
commercial annuity in satisfaction. D's property settlement 
agreement incident to D's divorce, signed three years prior to D's 
death, obligates D or D's estate to pay to S, D's former spouse, 
$20x per year for 10 years. D's estate purchases a commercial 
annuity from an unrelated dealer in commercial annuities, XYZ, in a 
bona fide sale to satisfy the obligation to S. E may deduct the 
entire amount paid to XYZ to obtain the annuity, regardless of 
whether or not the obligation to S was contingent.

    (e) Effective date. The rules of this section apply to the estates 
of decedents dying on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register.
    Par. 6. Section 20.2053-6 is amended by revising paragraphs (a) and 
(c) and adding new paragraphs (g) and (h) to read as follows:


Sec.  20.2053-6  Deduction for taxes.

    (a) In general. Taxes are deductible in computing a decedent's 
gross estate only as claims against the estate (except to the extent 
that excise taxes may be allowable as administration expenses), and 
only to the extent not disallowed by section 2053(c)(1)(B) (see the 
remaining paragraphs of this section). However, see Sec. Sec.  20.2053-
9 and 20.2053-10 with respect to the deduction allowed for certain 
state and foreign death taxes.
* * * * *
    (c) Death taxes. (1) For the estates of decedents dying on or 
before December 31, 2004, no estate, succession, legacy or inheritance 
tax payable by reason of the decedent's death is deductible, except as 
provided in Sec.  20.2053-9 and Sec.  20.2053-10 with respect to 
certain state and foreign death taxes on transfers for charitable, 
etc., uses. However, see sections 2011 and 2014 and these regulations 
with respect to credits for death taxes.
    (2) For the estates of decedents dying after December 31, 2004, see 
section 2058 to determine the deductibility of state death taxes.
* * * * *
    (g) Post-death adjustments of deductible tax liability. Post-death 
adjustments increasing a tax liability accrued prior to the decedent's 
death, including increases of taxes deducted under this section, will 
increase the amount of the deduction taken under section 2053(a)(3) for 
that tax liability. Similarly, any refund subsequently determined to be 
due to and received by the estate with respect to taxes deducted by the 
estate under this section reduces the amount of the deduction taken for 
that tax liability under section 2053(a)(3). Expenses associated with 
defending the estate against the increase in tax liability or with 
obtaining the

[[Page 20087]]

refund may be deductible under Sec.  20.2053-3(d)(3). A protective 
claim for refund of estate taxes may be filed before the expiration of 
the period of limitations for claims for refund in order to preserve 
the estate's right to claim a refund if the amount of a deductible tax 
liability may be affected by such an adjustment or refund. The 
application of this section may be illustrated by the following 
examples:

    Example 1. Increase in tax due. After the decedent's death, the 
Internal Revenue Service examines the gift tax return filed by the 
decedent in the year before the decedent's death and asserts a 
deficiency of $100x. The estate spends $30x in a non-frivolous 
defense against the increased deficiency. The final determination of 
the deficiency, in the amount of $90x, is paid by the estate. The 
estate may deduct $90x under section 2053(a)(3) and $30x under Sec.  
20.2053-3(c)(2) or (d)(3).
    Example 2. Refund of taxes paid. Decedent's estate timely files 
D's individual income tax return for the year in which the decedent 
died. The estate timely pays the entire amount of the tax due, $50x, 
as shown on that return. The entire $50x was attributable to income 
received prior to the decedent's death. Decedent's estate 
subsequently discovers an error on the income tax return and files a 
timely claim for refund. Decedent's estate receives a refund of 
$10x. The estate is only allowed a deduction of $40x under section 
2053(a)(3) for the income tax liability accrued prior to the 
decedent's death. If a deduction for $50x was allowed on the estate 
tax return prior to the receipt of the refund, it shall be the duty 
of the executor to notify the Commissioner of the change and to pay 
the resulting tax, with interest.

    (h) Effective date. The rules of this section apply to the estates 
of decedents dying on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register.
    Par. 7. Section 20.2053-9 is amended as follows:
    1. Revising the heading for paragraph (a) and adding a sentence at 
the end of paragraph (a).
    2. Revising the first and last sentences of paragraph (c).
    3. Adding new paragraph (f).
    The revisions and addition read as follows:


Sec.  20.2053-9  Deduction for certain state death taxes.

    (a) General rules for the estates of decedents dying on or before 
December 31, 2004.* * * For the estates of decedents dying after 
December 31, 2004, see section 2058 to determine the deductibility of 
state death taxes.
* * * * *
    (c) Exercise of election. The election to take a deduction for a 
state death tax imposed upon a transfer for charitable, etc., uses 
shall be exercised by the executor by the filing of a written 
notification to that effect with the Commissioner. * * * The election 
may be revoked by the executor by the filing of a written notification 
to that effect with the Commissioner at any time before the expiration 
of such period.
* * * * *
    (f) Effective date. The rules of this section apply to the estates 
of decedents dying on or before December 31, 2004.
    Par. 8. Section 20.2053-10 is amended by revising paragraph (c) and 
adding a new paragraph (e) to read as follows:


Sec.  20.2053-10  Deduction for certain foreign death taxes.

* * * * *
    (c) Exercise of election. The election to take a deduction for a 
foreign death tax imposed upon a transfer for charitable, etc., uses 
shall be exercised by the executor by the filing of a written 
notification to that effect with the Commissioner. An election to take 
the deduction for foreign death taxes is deemed to be a waiver of the 
right to claim a credit under a treaty with any foreign country for any 
tax or portion thereof claimed as a deduction under this section. The 
notification shall be filed before the expiration of the period of 
limitations for assessment provided in section 6501 (usually 3 years 
from the last day for filing the return). The election may be revoked 
by the executor by the filing of a written notification to that effect 
with the Commissioner at any time before the expiration of such period.
* * * * *
    (e) Effective date. The rules of this section apply to the estates 
of decedents dying on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-7601 Filed 4-20-07; 8:45 am]
BILLING CODE 4830-01-P


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